Well-known bond-fund manager Bill Gross appeared on CNBC yesterday and talked about the Federal Reserve, the federal funds rate, and where to invest these days. From the CNBC website:

Reacting to the Fed’s move to hold its key interest rate at 2 percent, Gross called talk of rate hikes “comical.”

“We’re in a recession. When has the Fed ever raised rates in a recession?” he said. “Unemployment is headed toward 6 percent, mortgage rates on home buyers are at 7 percent, and these guys want to raise rates?”

PIMCO’s founder and chief investment officer outlined what he thought the Federal Reserve should be doing now. According to CNBC:

Gross said the central bank has a responsibility now to provide liquidity.

“We’re in an asset deflation of near-historic proportions. That calls for the use of the government’s balance sheet and not for the Federal Reserve to raise interest rates,” he said. “To the extent that the central banks now must prevent that deflation, interest rates don’t go up, they go down.”

However, Gross said the Fed cannot lower its key rate, but rather he called on central banks across the world to examine their monetary policy.

“In the US, 2 percent is pretty much the floor. I think the Fed made that clear,” he said. “They’re going to provide liquidity in different forms and fashions.”

Gross, who Warren Buffett calls one of the smartest individuals he knows, told CNBC viewers where, and where not to, invest. From the CNBC piece:

As for investments at this point in the market, Gross advised against junk bonds and toward government-backed securities.

“We want to stay under the umbrella to the extent that we have an umbrella that shelters large banks and to the extent that we have an umbrella that shelters the agencies, Fannie and Freddie, that’s where you want to be,” he said. “Why mess with junk bonds? Let’s stick to high quality and stay under that umbrella. Let’s stay dry.”

The 4 minute 52 second CNBC segment can be viewed here.

Source:

“Pimco’s Gross: Fed Can’t Raise Rates Due to Economy”
CNBC, August 5, 2008

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